Monetary Policy in Singapore and the Global Financial Crisis

Do Not Distribute Without Permission

Copyright © 2020 IG Publishing Pte Ltd. All Rights Reserved

Do Not Distribute Without Permission

Published in Challenges for the Singapore economy in the post-crisis era, pp. 139-167. 

World Scientific. 2011.

---

b1110

Challenges for the Singapore Economy

monetary base which would be transmitted to the rest of the

economy through financial intermediation. Financial markets would

then adjust longer-term interest rates relevant to the real economy,

such as mortgage rates and 12-month corporate bond rates, and

could largely be left alone to price risk and allocate credit efficiently,

since financial markets were generally considered to be rational and

efficient.

But there is a problem if banks will not lend because lenders are

worried that loans will not be repaid or could not be sold on. The

result is a credit crunch reflected in a widening of interest rate spreads

as banks borrow cheaply from the central bank but lend to their

customers at much higher rates (or not at all) in the inter-bank mar-

ket. This clogs up the traditional monetary transmission mechanism

and eventually spills over into the real economy and produces a defla-

tionary spiral. Monetary policy thus becomes powerless as everyone

rushes into cash to fill the holes in their short-term funding and any

increase in the monetary base engendered by the central bank ends

up mostly in the reserves held by the banks themselves rather than in

the money supply. The problem is compounded by the fact that no

central bank can reduce nominal interest rates below zero.

Once the global financial crisis had clearly broken in the second

half of 2008

69

and it was clear that reducing nominal interest rates and

providing more liquidity through traditional channels was insufficient,

the emphasis quickly switched to avoiding a loss of confidence in the

financial markets, a catastrophic fall in spending and asset prices and a

full-blown depression of the 1930s variety. Central banks responded

by offering emergency measures in the form of more types of credit,

easier borrowing conditions and longer terms for loans. The European

Central Bank (ECB), for example, guaranteed unlimited funds for up

to six months instead of one week. Meanwhile in the autumn of 2008

the US Federal Reserve (FED) introduced targeted direct lending to

the private sector 

via

purchases of commercial paper and its Term

140

C. H. Kwan and P. Wilson

69

See Asian Development Bank (2009) and Chapter 2 of this book for the timeline

of the crisis.

b1110_Chapter-08.qxd  2/21/2011  11:03 AM  Page 140